Reporting season has officially finished, but volatility hasn’t subsided just yet and stockbroking analysts continue to issue more rating upgrades than downgrades. Most of these rating changes, in both directions, are motivated by a rising gap between share price and intrinsic valuations.
In the good books
AWE LIMITED (AWE) was upgraded to Outperform from Neutral by Credit Suisse and to Buy from Neutral by UBS Buy/Hold/Sell: 5/2/0 Credit Suisse applies new oil price and currency assumptions to oil and gas stocks and upgrades AWE to Outperform from Neutral, given significant share price decline. The recent share price slide has been overdone in UBS’ view and the rating is upgraded to Buy from Neutral on valuation grounds.
CHARTER HALL GROUP (CHC) was upgrade to Buy from Neutral by UBS Buy/Hold/Sell: 4/1/2 UBS is upgrading because of positive earnings revisions after the deployment of equity, while assets under management are increasing ahead of market expectations. The implied value of the funds management business is considered the cheapest since 2013.
DOWNER EDI LIMITED (DOW) was upgraded to Buy from Hold by Deutsche Bank Buy/Hold/Sell: 4/2/1 Since the FY15 result the company’s share price has fallen 16% and Deutsche Bank considers this overly bearish. Deutsche Bank upgrades given a strong management team, 6.0% dividend yield, cheap valuation and the high level of recurring revenue. There is also potential for value-accretive acquisitions.
FEDERATION CENTRES (FDC) was upgraded to Neutral from Underperform by Credit Suisse Buy/Hold/Sell: 2/3/2 The company has guided to earnings of 18.8-19.1c per security. Credit Suisse retains FY16 forecasts at the top of this range. The broker expects growth will slow into FY17.
FORTESCUE METALS GROUP LTD (FMG) was upgraded to Neutral from Underweight by JP Morgan Buy/Hold/Sell: 3/3/2 The company has set some aggressive cost cutting targets aimed at getting net direct cash costs (or C1) to US$18 a tonne in FY16. JP Morgan analysts see potential for better-than-expected performance and hence the risks are now more balanced.
GPT (GPT) was upgraded to Neutral from Sell by UBS and to Overweight from Underweight by Morgan Stanley Buy/Hold/Sell: 2/5/0. The broker’s rationale for the upgrade is based on the core portfolio, with office and retail looking better than expected. The retail segment continues to be driven by strength in the housing market, low interest rates and slowing online growth. Morgan Stanley upgrades because of better growth prospects relative to the sector and the high degree of certainty. There is also potential to slow cost growth while retaining leverage to higher asset values via the funds management platform.
MIRVAC GROUP (MGR) was upgraded to Overweight from Underweight by Morgan Stanley Buy/Hold/Sell: 5/1/1 Morgan Stanley upgrades to Overweight from Underweight, given the price weakness. Mirvac is trading at a discount to net tangible assets despite a positive outlook for commercial asset and inventory values.
METCASH LIMITED (MTS) was upgraded to Neutral from Underweight by JP Morgan Buy/Hold/Sell: 1/3/2 JP Morgan notes the balance sheet is being repaired and, with valuation support emerging, upgrades to Hold from Sell. With the fall in the share price and revised earnings forecasts the risks are now better accounted for.
PREMIER INVESTMENTS LIMITED (PMV) was upgraded to Buy from Neutral by UBS Buy/Hold/Sell: 1/5/0 UBS estimates the company direct sources 40-50% of its core brands and may lift this to over 80% in the next three years. With a positive mix change towards Smiggle/Peter Alexander, the broker forecasts gross margins to rise by 250 basis points over FY15-20. While there are risks with direct sourcing the broker envisages the company well able to manage these risks.
STOCKLAND (SGP) was upgraded to Buy from Neutral by UBS Buy/Hold/Sell: 4/1/2 The reasons for the upgrade include a valuation discount that is too large to ignore and the lower risk development business that is not appreciated by the market.
SIGMA PHARMACEUTICALS LIMITED (SIP) was upgraded to Neutral from Sell by Citi, to Buy from Neutral by UBS, and to Equal-weight from Underweight by Morgan Stanley Buy/Hold/Sell: 2/5/0 First half results were mixed, with revenue above forecasts and earnings below. Acquisitions have outperformed Citi’s expectations. Citi re-bases forecasts to allow for the share buy-back activity. Morgan Stanley now suspects industry growth is less sluggish, although remains cautious ahead of an update at the first half results.
In the not-so-good books
MACQUARIE ATLAS ROADS GROUP (MQA) was downgraded to Neutral from Buy by UBS Buy/Hold/Sell: 3/3/0 Following a change of analyst, UBS downgrades to Neutral from Buy. Near-term distribution forecasts have increased slightly, to reflect upside in APRR’s recent concession amendments. UBS has also pushed back the timing of the expected step up.
PACIFIC BRANDS LIMITED (PBG) was downgraded to Neutral from Overweight by JP Morgan Buy/Hold/Sell: 1/5/0 Following a re-positioning of the brands in the portfolio after divestments, JP Morgan notes the company is more reliant on Bonds and Sheridan, with a growing direct-to-consumer channel now 36% of sales.
Earnings Forecasts
FNArena tabulates the views of eight major Australian and international stock brokers: BA-Merrill Lynch, CIMB, Citi, Credit Suisse, Deutsche Bank, JP Morgan, Macquarie and UBS.
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